NZ manufacturers support prospect of amended RBNZ target

Thursday 3rd July 2008

New Zealand exporters say they'd welcome reform of the central bank's policy targets agreement as the bank's inflation battle, driving interest rates higher, has had a 'devastating' impact on their returns.

Associate Finance Minister Trevor Mallard yesterday said the central bank's policy tools haven't been able to address the impact of record high prices for fuel and food, and the government is "open to looking at alternatives." Finance Minister Michael Cullen today said no alternatives are currently being considered.

The policy of using interest rates to curb inflation has made New Zealand's dollar attractive to foreign investors and driven up the Kiwi dollar, hurting exporters, said John Walley, chief executive of the New Zealand Manufacturers and Exporters Association.

"We need to break the link between inflation and the exchange rate."

The Reserve Bank's 8.25% official cash rate is the highest of any nation with an Aaa rating from Moody's Investors Service. Governor Alan Bollard has predicted inflation will peak at 4.8% in the third quarter, above the 1%-to-3% range he targets.

The central bank included in its latest statement of intent that it would consider "options for alternative instruments" for monetary policy.

New Zealand was the first economy to introduce an inflation target, in 1990. Mallard said while a single focus on inflation was appropriate when the target was first adopted, "the economy has changed a lot in the last 20 years: the major sources of inflation are different, and we have a much more open economy."

Mallard said it is too soon to say what changes may be made to the PTA. Walley says exporters and manufacturers advocates compulsory pension savings, with the savings rate adjusted based on inflation.

Cullen said the government is awaiting the finance and expenditure select committee inquiry into the central bank and any work the bank itself generates.

By Jonathan Underhill

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